Chinese Property Developers Go West

Great locations in New York, Los Angeles or San Francisco. Properties in shiny new developments. Crash pads for kids to use during college – even if those kids are currently in preschool.

It also helps if property developers reach out to Chinese customers with staff who speak Mandarin and information in their language. So it’s natural that residential developers from China are starting to tap into the growing Chinese market in the United States. But the strategy also provides an opportunity for diversifying developers’ investments amid fears of a property bubble back home.

“Chinese developers are losing confidence in the domestic market and are now seeking to find more secure returns in a place like the U.S.,” said Ben Carlos Thypin, director of market analysis for research and consulting firm Real Capital Analytics Inc.

A deal in San Francisco may offer a taste of what’s to come, analysts say. China Vanke, the mainland’s biggest developer of residential properties, said in February that it is partnering with American property developer Tishman Speyer on a project for two luxury condo towers in San Francisco that will have 655 residences and bay views.

China Vanke will own a 70 percent stake in the $620 million project, which will be marketed to mainland Chinese buyers, according to a Credit Suisse research note entitled “First Project in the US: Reconfirming a Trend.” In April, as part of its expansion, the company also took a stake in a condo project in Singapore.

Such international deals are still an experiment for China Vanke.

“We still don’t know what price they’ll be selling at, what the margin will be, what the profitability is,” said Jinsong Du, Head of Asian Real Estate Research at Credit Suisse. If such properties prove lucrative, Chinese developers may pursue their geographical diversification on a bigger scale, he says.

After years of red-hot growth in China’s property market, the Chinese government is trying to cool things down and curb speculation, partly by forcing buyers to make higher down payments and limiting how many properties they can own in China.

That’s one reason more Chinese are buying homes abroad, particularly in Sydney and Melbourne in Australia and New York, Los Angeles and San Francisco in the United States. Adding to the appeal, the U.S. home market is still discounted from its 2006 peak, the yuan is strong, and owning a U.S. home is viewed in China as both a solid investment and a point of pride.

Chinese buyers spent some $9 billion buying U.S. homes in the year up to March 2012, according to figures from the National Association of Realtors. Among foreign buyers, only Canadians buy more U.S. homes than the Chinese.

Meanwhile, Chinese developers interested in opportunities abroad are finding they need a competitive advantage to differentiate themselves from local players. That’s where their knowledge of Chinese homebuyers comes in, said Chris Brooke, chairman and CEO for China at CBRE Group Inc., the world’s biggest commercial real estate services firm.

“Targeting Chinese consumers is probably something that will be replicated by others or replicated by Vanke – they can target the product toward a consumer they really understand,” Brooke said.

Vanke’s model of teaming with a local partner also makes sense, especially for residential developments being built from the ground up, where local knowledge is especially important, he said.

The China Vanke deal drew attention for its size, though it was not the first of its kind. China’s Xinyuan Real Estate Co. Ltd. last year purchased a site in Williamsburg, Brooklyn, for $54.2 million. It plans to build housing there, partly to “capture a large demand from China for quality residential product in the United States,” Chairman and CEO Yong Zhang said at the time.

Like New York and San Francisco, Los Angeles County also has a large Chinese community. May Hsu, a Sotheby’s International realtor in the area, thinks a Chinese-targeted community in affluent areas like San Marino or Arcadia “would definitely be a seller.”

Chinese buyers often have specific desires when it comes to U.S. property.

Patrick ONeill, founder of Hong Kong-based O’Neill Group, which helps
Chinese buyers find U.S. properties, says some clients look for inexpensive investment properties to rent out, while others typically spend between $1 million and $3 million for a place to use for themselves or their families.

Buyers from the mainland often prefer newly built properties to older ones. Sometimes they’re looking for a prestigious brand name, like Ritz Carlton or Mandarin Oriental, or what O’Neill calls “A+” locations.

“They all say, ‘I want Upper East Side, Fifth Avenue,’” O’Neill said. “Everyone knows these sorts of marquee locations, though budget constraints will often shift them into something else.”

Many purchases are tied to children’s education – parents might plan for their child to live there during college or after graduation. Often, they’re thinking way ahead.

“Chinese families will say, ‘I think my children might go to school there,’ and I’ll say, ‘Oh, how old are your children?’ and they’ll say, ‘4-years-old,’” O’Neill said. “We hear that quite often.”